Watch out for subtle overcharging by financial institutions

28May2012

As the owner of an SME (Small or Medium Enterprise), and as an individual consumer of financial services, I am always amazed by the standard fees that financial institutions charge for various types of transactions. In this article, I will deal with three examples: visa payments, foreign currency exchange, and wire transfers.

Visa payments. When travelling abroad, I notice that hotels will almost always charge in local currency. This applies even when they have given you a quotation in US dollars or Euros. This means that for someone like myself, with a USD visa account, the hotel converts the amount owing from USD to local currency (often at the very poor exchange rates offered by hotels in general), and then the credit card company will charge again for converting it back to USD. In other words, the poor unsuspecting consumer is charged for two currency transactions, when he or she does not require any. The two transactions together can easily account for 5-10% of the overall charge. De facto, you may be paying 10% more for your hotel, without realizing it.

Foreign currency exchange. Often banks will not even give SME’s or individual consumers an exchange rate, claiming that it will be the applicable exchange rate whenever the foreign currency department gets around to doing the transaction. After considerable to-and-fro, my bank finally gave me the exchange rate, and I was actually appalled at how poor the exchange rates were. Once again, I can save 5-10% of the transaction by withdrawing the conversion amount in cash, shopping around at the money changers and having the money changers do the conversion, then re-depositing the amount to my bank account. Even with the bank charging half a per cent cash withdrawal fee (another egregious expense), I can save approximately 7-12% on the conversion.

Wire transfers. A few years ago when I was purchasing my house, by chance the vendor had her account in exactly the same branch as my account. The branch of this major Austrian bank charged over EUR 3,000 for one transfer within the same branch! In North America, banks typically charge a fixed transaction fee, usually a few dollars for a check, up to $20 for a wire transfer. The European practice of charging a percentage of the transaction value is what causes this type of anomaly.

The other issue with wire transfers is that banks typically sit on your money for days at a time. Looking at my own experience over the past 10 years, I would say that the average length of time for a wire transfer is around three business days. We live in a day and age where these sorts of transactions should occur instantaneously, latest within 24 hours. Of course, for the excess time required for your transfer, your money is working for the banks, not for you. De facto, this boils down to a hidden charge on the amount of cash you are tying up. The situation is aggravated if you are meanwhile paying a hefty overdraft borrowing rate.

The problem with the above phenomena is not that they happen once. It’s that they are happening on most transactions entered into by SME’s in Europe. For an SME that has a million Euros of turnover, this can easily result in several tens of thousands of euros of hidden and needless expense. Some SME owners are astute enough to negotiate at least a better deal with their banks. I am currently shopping around for a new banking relationship and am surprised by how inflexible most banks are. (Thank goodness, I only need to find one bank that is more flexible). Financial charges on SME’s is an issue that goes to the core of the very competitiveness of the European SME sector. The odds are stacked in favour of the financial institutions.